Rob Santoni, owner of Santoni's supermarket in Highlandtown, has been advocating for a reduction in the interchange fee merchants have to pay banks when customers use debit cards. This helps retailers like Santoni maintain lower costs and senior discounts.

Rob Santoni, owner of Santoni's supermarket in Highlandtown, has been advocating for a reduction in the interchange fee merchants have to pay banks when customers use debit cards. This helps retailers like Santoni maintain lower costs and senior discounts. (Baltimore Sun photo by Gabe Dinsmoor)

Eileen Ambrose, The Baltimore Sun

You might not have paid attention to the fierce yearlong battle between merchants and banks over debit cards, but you'll likely notice last week's outcome in your wallet.

The dispute was over the debit card interchange fee — the payment merchants make to banks to process customer transactions. Last year's Wall Street Reform and Consumer Protection Act law required that the Federal Reserve ensure that the fee was "reasonable."

Last week, the Fed announced it was cutting the fee — but not by nearly as much as merchants wanted.

Even so, consumers can expect repercussions.

"The banks, any time they lose income, we eventually pay for it," says Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website.

Debit and credit cards both have interchange fees, but the new rule applies only to debit cards — the plastic of choice among consumers. When you swipe a debit card, the merchant pays an average of 44 cents per transaction, according to the Fed. This fee in 2009 generated more than $16 billion in revenue for banks.

The Fed had proposed capping the fee at cents per transaction, to the delight of merchants. But banks warned of dire consequences — such as the demise of free checking — if their income was slashed.

The Fed settled last week on a maximum fee of 21 cents plus 0.05 percent of the transaction amount. That works out to about 24 cents on the average $38 debit purchase, the Fed says. The new rule, which applies only to big banks, takes effect Oct. 1.

Merchants were crushed.

"It shows you the strength of Wall Street," says Rob Santoni Jr., chief financial officer of Santoni's Supermarket in Highlandtown. "Main Street retailers and grocers just aren't as important" to the Fed.

Santoni has watched over the years as interchange fees have climbed. He says his single store pays about $46,000 a year in fees, making them the grocer's third-largest expense, after labor and advertising.

Santoni, chairman of the Maryland Food Dealers Council, says he was a big fan of debit cards many years ago, when fees were low. But once the cards started carrying the Visa and MasterCard logos, allowing customers to use the plastic in more places, fees rose and cut deeply into his already thin profit margins, he says.

He expects the rule to save him no more than $10,000 a year, a savings that he says will help him "maintain low prices," daily senior discounts and double-coupon deals.

Banks were relieved that the fee cut wasn't deeper. Still, the American Bankers Association says fee income will be reduced by 45 percent, and consumers will end up paying higher fees for basic banking services.

Here are other changes industry players say consumers will see:

FEWER REWARD PROGRAMS Banks had started to dump or restrict reward programs on debit cards in anticipation of the loss of interchange fee income. And that's likely to continue.

J.P. Morgan Chase, the second-largest issuer of debit cards, told 8 million debit-card customers in March that it would be eliminating its debit-card rewards — including airline miles and cash back — in mid-July because of the cap on interchange fees.

GOODBYE, FREE CHECKING It costs $250 to $300 a year for banks to provide a full-service checking account, a service subsidized partly by overdraft and debit-card interchange fees, says Nessa Feddis, senior counsel with the bankers association.

Consumers can expect to see banks do away with free checking, or require customers to clear more hurdles — such as meeting minimum balances, using direct deposit or having more than one account at the bank — to avoid paying a fee for checking, she says.

MORE KINDS OF PLASTIC The new fee limit doesn't apply to credit cards and certain prepaid cards.

As a result, consumers will see more banks jump into the prepaid card market, which has been growing anyway, Feddis says.

And banks might bring back charge cards, which are credit cards that must be paid off every month, to appeal to consumers who want to control their spending, she says.

STEERING LowCards' Hardekopf says retailers might encourage the use of cash or debit cards, instead of credit cards that will maintain the old interchange rates. For instance, he says, a merchant might offer a discount to customers paying in cash rather than credit. Or retailers might not permit a credit card to be used for small purchases.

Baltimore grocer Santoni, however, says merchants aren't going to risk alienating customers by dictating what type of payment they must use.

"That's business suicide," he says.

Banks, too, might steer consumers, but away from debit to credit cards, Hardekopf says. He says he's noticed that banks have sweetened credit card reward programs in the past year for good customers, giving them more incentive to use that plastic.